INTRODUCTION
On March 26, 2024, the Commodity Futures Trading Commission (CFTC), brought a civil enforcement action in the U.S. District Court for the Southern District of New York against the group of entities it argues collectively operate as the centralized digital asset exchange KuCoin. The CFTC claims that KuCoin violated the Commodity Exchange Act (CEA) and other regulations promulgated by the CFTC. The CFTC brings its claims pursuant to Section 6c of the CEA and seeks to enjoin KuCoin’s allegedly unlawful practices and compel its compliance with the CEA. Additionally, the CFTC is seeking civil monetary penalties and remedial ancillary relief, which could include trading and registration bans, disgorgement, pre and post-judgment interest, and any other relief the court may ultimately deem necessary.
According to the CFTC, KuCoin offers trading in more than 700 digital asset products and has more than 27 million customers in more than 200 countries, with a transaction volume that exceeded $3.6 trillion in 2022. Customers can trade on KuCoin through either its website, or through a mobile application available on Apple, Google, and Android mobile devices. Those familiar with crypto and the current US regulatory landscape may have seen KuCoin on various US-based social media platforms including X (formerly Twitter.com) and Reddit (see subreddit r/KuCoin).
KUCOIN’S ALLEGED VIOLATIONS
The CFTC alleges that between “at least July 2019 and continuing to at least June 2023” KuCoin violated the CEA in five ways: (1) KuCoin executed leveraged, margined, or financed retailed commodity and futures transactions involving commodities on an unregistered board of trade; (2) that it engaged in activities that can only lawfully be performed by a registered futures commission merchant; (3) that it failed to register as a Designated Contract Market (DCM) or Swap Execution Facility (SEF); (4) that it failed to diligently supervise; (5) that it failed to implement customer identification programs and Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.
The CFTC argues it has authority over KuCoin because, during the relevant period, it solicited and accepted orders, accepted property to margin, and operated a facility for the trading of futures, swaps, and leveraged, margined, or financed retail transactions involving digital assets. Further, the CFTC points out that “between 20% and 50% of KuCoin’s customers were based in the United States according to KuCoin’s own promotional material[,]” and further, the CFTC argues KuCoin deliberately solicited US persons and attempted to obscure its solicitation of US persons by implementing half measures designed to feign compliance with applicable laws and regulations such as the CEA.
The CFTC focused its argument on the alleged half measures implemented by KuCoin that provided what the CFTC described as “at best, a fig leaf of compliance with applicable U.S. laws and regulations.” The CFTC notes that throughout the relevant period, KuCoin’s Terms of Use stated that people from certain locations such as the US could not use KuCoin’s platform. However, the CFTC argues that KuCoin never implemented any mandatory measures to verify the location or residence of its customers or to restrict US customers from accessing and trading commodity derivatives on its platform. Further, the CFTC alleges that in November 2018 KuCoin implemented “sham” KYC procedures that did not actually prevent US customers from trading commodity interests and other derivatives on the platform. The CFTC argues instead that KuCoin’s procedures were “completely optional” and that KuCoin even encouraged US customers to avoid them. The CFTC concedes that US customers that submitted KYC information were subject to certain trading restrictions, but also points out that those restrictions did not prohibit them from trading commodity derivatives altogether. The CFTC concludes that even after KuCoin received KYC information confirming that some of its customers were US persons, it continued to allow those customers to engage in train go futures, swaps, and leveraged, margined, or financed retail commodity transactions in violation of the CEA and other regulations. Additionally, the CFTC alleges KuCoin failed to impose any IP address restrictions to prevent US customers from trading commodity interests or accounting for commonly used technology such as virtual private networks (VPNs) that could potentially circumvent IP address restrictions.
The CFTC also spent considerable time reviewing KuCoin’s marketing activities that were allegedly designed in part, to attract US customers. The CFTC claims KuCoin paid internet influencers to promote its platform and share referral codes, and even requested that the influencers describe the ability to trade on KuCoin from the US as a “gray area,” when KuCoin knew that their commodities transactions were illegal in the US.
“For too long, some offshore crypto exchanges have followed a now-familiar playbook by offering derivative products and falsely claiming people in the United States cannot use their platforms when in reality, anyone in the U.S. with commonly used technology can trade without providing basic customer identifying information,” said CFTC Director of Enforcement, Ian McGinley.
CFTC SAYS “MANY” DIGITAL ASSETS COMMODITIES
Buried amongst the doom and gloom of what is an otherwise fairly scathing complaint, the CFTC found time to shout out a few cryptocurrencies it considers “commodities” in interstate commerce as defined under Section 1a(9) of the CEA. In defining digital assets, the CFTC stated that many, “including BTC, ETH, LTC, and stablecoins like USDC and USDT[.]” While this complaint holds no binding power, those in the cryptocurrency space can breathe a bit easier knowing that at least one of the agencies purporting cryptocurrency is within its purview does not consider all assets in the space to be securities.
However, crypto proponents should wait to get carried away. The CFTC has a history of claiming many digital assets are commodities. Still, in its official response to the infamous case SEC v Telegram, it did not rule out that such assets could also be securities.
HAVE MORE QUESTIONS?
Navigating the intricate web of cryptocurrency regulations in the United States is undoubtedly a daunting task, and the dynamic nature of this space underscores the need for ongoing vigilance and legal counsel to avoid potential pitfalls and ensure that businesses and investors can thrive within the bounds of the law. As attorneys operating exclusively in the digital asset space, we understand the importance of staying informed on the latest developments and helping clients stay compliant as cryptocurrency’s future in the United States continues to be shaped by regulatory developments. Whether you are an investor, entrepreneur, or business involved in cryptocurrency, our team is here to provide the legal counsel needed to maneuver this complex landscape. If you believe we can be of assistance, schedule a consultation here.